Moody's downgrades China's credit rating for first time since 1989

Concerns over the strength of the Chinese economy has led to Moody's downgrading the nation's credit rating for the first time in more than a quarter of a century.

Mei said China's economic performance this year had exceeded market expectations and criticized Moody's for including debt at state-owned enterprises (SOEs) and local government financing vehicles as indirect government liabilities.

China's local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. It's the first time Moody's has cut the country's credit rating since 1989.

The downgrade was based on the "pro-cyclical" rating approach which is "inappropriate", the Ministry of Finance (MOF) said.

Chinese leaders have identified the containment of financial risks as a top priority this year, but are moving cautiously to avoid choking economic growth.

However, it highlighted that official growth targets are likely to fall at a more gradual pace, given the importance the Chinese government attaches to them, "rendering the economy increasingly reliant on policy stimulus".

China's 13 Five-Year-Plan projects sustained growth of 6,5% a year for 2016-2020, while the 6,9% expected for this year is the slowest since 1990. 'A psychological blow'Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, described the downgrade as "a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures". Standard & Poor's recently upgraded China's rating to AA-, equivalent to one notch above Moody's new rating.

China's debt has been increasing lately by an amount equal to about 15% of the country's output each year, to keep the economy growing from 6.5% to 7%.

The Shanghai Composite Index dropped 0.4 percent to 3,050.94 at the midday break, paring an earlier decline of 1.3 percent. But it's not the first time that worldwide institutions have sounded alarm bells about China's rising debt levels. But analysts have expressed skepticism about whether Beijing will back up its talk with real action since freewheeling credit conditions have underpinned the growth China's Communist Party relies on for political legitimacy. It sheds new doubt on the gradualism approach that Beijing is taking to address the debt problem and its ability to simultaneously cut debt in the financial system and keep GDP growth steady at 6.5% a year.

Peter Rosenstreich, Swissquote Bank, commented: "While the credit rating cuts failed to hurt China's stock markets, AUD headed lower following industrial commodities weakness and risk in China".

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic".

Moody's has warned China for its slowing economy and rising debt.

  • Zachary Reyes